GAO-06-69R States’ Medicaid Payments for Prescription Drugs

United States Government Accountability Office

Washington, DC 20548 

October 31, 2005 

The Honorable Edward Whitfield 

Chairman 

Subcommittee on Oversight and Investigations 

Committee on Energy and Commerce 

House of Representatives 

Subject: Medicaid: States’ Payments for Outpatient Prescription Drugs

Dear Mr. Chairman: 

Spending on outpatient prescription drug coverage for Medicaid beneficiaries has 

accounted for a substantial and growing share of Medicaid program expenditures.1

 

All states and the District of Columbia have elected to include outpatient prescription 

drug coverage as a benefit of their Medicaid programs. Total Medicaid expenditures 

on outpatient prescription drugs grew from $4.6 billion (nearly 7 percent of 

Medicaid’s total medical care expenditures) in fiscal year 1990 to $33.8 billion (13 

percent of Medicaid’s total medical care expenditures) in fiscal year 2003. This 

represented more than twice the rate of increase in total Medicaid spending from 

fiscal year 1990 through fiscal year 2003. Amid concerns about increasing Medicaid 

drug spending, focus has been drawn to the ways states pay for prescription drugs. 

State Medicaid programs pay pharmacies for covered outpatient prescription drugs 

dispensed to Medicaid beneficiaries. The Centers for Medicare & Medicaid Services 

(CMS)—the agency of the Department of Health and Human Services (HHS) that 

oversees states’ Medicaid programs—sets maximum payment limits for certain 

drugs—federal upper limits (FUL)2

—and provides guidelines regarding drug payment, 

as defined by regulation.3

 Within these parameters, states may determine their own 

drug payment methodologies. States are to pay pharmacies the lower of the state’s 

estimate of the drug’s acquisition cost to the pharmacy, plus a dispensing fee, or the 

 

1

Medicaid is a joint federal-state program that finances health insurance for certain low-income adults 

and children. 

2

See 42 C.F.R. § 447.332 (2004). Federal regulations require CMS to set specific FUL amounts for 

certain multiple-source drugs that are provided by at least three suppliers. A multiple-source drug is a 

drug that is either marketed or sold by two or more manufacturers or labelers, or marketed or sold by 

the same manufacturer or labeler under two or more different proprietary names or both under a 

proprietary name and without such a name. Payments for these drugs must not exceed, in the 

aggregate, a reasonable dispensing fee plus an amount that equals 150 percent of the lowest published 

price of the drug listed in national pricing compendia. 

3

See 42 C.F.R. § 447.331 (2004). 
2 GAO-06-69R States’ Medicaid Payments for Prescription Drugs 

 

pharmacy’s usual and customary charge to the general public; for certain drugs, the 

FUL or the state maximum allowable cost (MAC) may apply if lower.4 All states 

estimate the acquisition cost of drugs using published prices because they do not 

have access to actual sales price data, which are not publicly available. Most states 

choose to estimate drug acquisition cost by taking a percentage discount off of 

Average Wholesale Price (AWP).5

 AWP is a list price that a manufacturer suggests 

wholesalers charge pharmacies. 

Based on concerns about escalating Medicaid drug expenditures, you asked us to 

review state Medicaid payments for covered outpatient prescription drugs. We 

reviewed how Medicaid payments for prescription drugs compared across selected 

states and how these states’ Medicaid payments for prescription drugs compared to 

three market-based prices. 

We briefed your staff on the information contained in this report on September 16, 

2005. As discussed with your staff at that time, we agreed to issue this report, which 

officially transmits the briefing slides (see enc. I) and expands on the information 

provided at the briefing. 

Scope and Methodology 

To examine state Medicaid payments for outpatient drugs, we analyzed CMS data to 

develop a basket of 200 drugs that accounted for more than half of Medicaid’s 

national spending on outpatient prescription drugs in 2003.6

 We judgmentally 

selected five states for review—Mississippi, Montana, Pennsylvania, South Carolina, 

and Utah; these states utilize a varying percentage discount off of AWP to estimate 

drug acquisition cost. We interviewed officials from the five states’ Medicaid 

agencies to gather information on each state’s pharmacy payment practices. We also 

obtained the five states’ 2003 payment data for each of the 200 drugs in our basket. 

For every drug, we calculated each state’s payment per unit.7

 Using these 

calculations, we reviewed the variation in the percent difference between the lowest 

state payment and the highest state payment for each drug. We report our findings 

4

As of December 2003, 38 states had established maximum allowable costs for multiple-source drugs at 

a rate below an established FUL or for drugs for which CMS had not set an FUL. 

5

States may obtain AWP from one or more national pricing compendia; although multiple sources 

publish price lists, the prices listed by one source do not necessarily equal the prices listed by other 

sources. 

6

For the purpose of this report, the term drug refers to a distinct national drug code (NDC). NDCs 

identify unique formulations of each drug, including the manufacturer, strength, and package size. A 

single drug may have multiple NDCs. Because our analysis was performed at the NDC level, multiple 

versions of the same drug are included in our basket. 

7

State’s payment per unit was the state’s payment to pharmacies as determined by the lowest of: the 

state’s estimate of drug acquisition cost, the pharmacy’s usual and customary charge, the FUL, if 

available, or the state MAC, if available, divided by the number of units dispensed. Our report 

summarizes results from our analysis of states’ payments per unit as calculated without dispensing 

fees. 
3 GAO-06-69R States’ Medicaid Payments for Prescription Drugs 

 

based on drug type (brand or generic) and drug therapeutic class based on data we 

obtained from First DataBank.8

To compare state Medicaid payments to selected market-based prices, we reviewed 

how states’ average payments compared to three prices that are based on actual sales 

transactions—Average Manufacturer Price (AMP), Best Price, and Federal Supply 

Schedule (FSS) Price. We selected AMP and Best Price because they are currently 

used in the Medicaid program to calculate drug rebates;9

 FSS Price was selected 

because it represents prices available to certain federal government purchasers. 

Table 1 provides descriptive characteristics of these prices. We obtained AMP and 

Best Price data from CMS and FSS Price data from the Department of Veterans 

Affairs (VA).10 We assessed the variation in the percent difference between each 

state’s payment and the states’ average payment, to each of the market-based prices. 

8

Drugs that possess similar chemical structures and similar therapeutic effects are grouped into 

therapeutic classes. Most drugs within a class produce similar benefits, side effects, adverse reactions, 

and interactions with other drugs and substances. 

9

The Omnibus Budget Reconciliation Act of 1990, Pub. L. No. 101-508 § 4401, 104 Stat. 1388-143–1388-

161, established the Medicaid drug rebate program to help control Medicaid drug spending. Under the 

rebate program, a pharmaceutical manufacturer pays rebates to states in order for federal payments to 

be available under Medicaid for the manufacturer’s outpatient drugs. 

10AMP and Best Price data are reported quarterly; we obtained data on both prices for all four quarters 

of 2003 and calculated the average 2003 AMP and Best Price. FSS Price is reported based on a 

contract period; if more than one contract was in place during calendar year 2003, we averaged the 

available 2003 FSS Prices for the purposes of our analysis. 
4 GAO-06-69R States’ Medicaid Payments for Prescription Drugs 

Table 1: Characteristics of Selected Market-Based Prices 

Price Definition 

Price determination 

method 

Defined by 

statute or 

regulation 

Data 

availability 

Average 

Manufacturer 

Price (AMP) 

The average price paid to 

manufacturers by wholesalers 

for drugs distributed to the retail 

pharmacy class of trade.a

Manufacturers calculate 

AMP based on actual 

sales data and report it to 

the Centers for Medicare 

& Medicaid Services 

(CMS).b

Yes Not publicly 

available 

Best Price The lowest price available from 

the manufacturer to any 

wholesaler, retailer, provider, 

health maintenance 

organization, or nonprofit or 

government entity, with some 

exceptions.c

Manufacturers calculate 

Best Price based on 

actual sales data and 

report it to CMS.b

Yes Not publicly 

available 

Federal 

Supply 

Schedule 

(FSS) Price 

A price that is intended to equal 

or better the prices charged to a 

manufacturer’s most favored 

nonfederal customer under 

comparable terms and 

conditions. FSS Prices are 

available to all direct federal 

purchasers of pharmaceuticals, 

although other lower prices may 

be available to the largest 

federal purchasers. 

On behalf of the federal 

government, the 

Department of Veterans 

Affairs (VA) negotiates 

FSS Prices based on 

manufacturer-reported 

data on actual sales to 

their most favored 

commercial customers. d

 

Yes Publicly 

available 

Source: GAO analysis of CMS and VA data. 

Note: Retail pharmacies that dispense prescription drugs to Medicaid beneficiaries may be unable to purchase 

drugs at AMP, Best Price, or FSS Price. 

a

See 42 U.S.C. § 1396r-8(k)(1). According to CMS, transactions used to calculate AMP are to reflect cash discounts 

and any adjustments that affect the price realized, but are not to include prices to direct federal purchasers based 

on the Federal Supply Schedule (FSS), prices from direct sales to hospitals or health maintenance organizations, 

or prices to wholesalers when they relabel drugs they purchase under their own label. There is no definition in 

the statute for “retail pharmacy class of trade.” 

b

The Omnibus Reconciliation Act of 1990 created AMP and Best Price for use in the Medicaid program to calculate 

drug rebates. As we noted in our February 2005 report, we found considerable variation in the methods 

manufacturers used to determine AMP and Best Price. See GAO, Medicaid Drug Rebate Program: Inadequate 

Oversight Raises Concerns about Rebates Paid to States, GAO-05-102 (Washington, D.C.: Feb. 4, 2005). 

c

See 42 U.S.C. § 1396r-8(c)(1)(C). CMS has further defined Best Price as the lowest price at which the 

manufacturer sells the drug to any purchaser in any pricing structure, including capitated payments, with some 

exceptions. Best Price is required to be reduced to account for price adjustments such as discounts and rebates, 

but is not to include prices charged to certain federal purchasers (including prices to direct federal purchasers 

based on the FSS) and other select purchasers. 

d

See Pub. L. No. 102-585, § 603, 106 Stat. 4943, 4971-75. The Veterans Health Care Act of 1992 required that drug 

manufacturers list their brand-name drugs on the FSS in order for purchases of such drugs to be eligible for 

Medicaid payment. During a multiyear contract period, FSS Prices may not increase faster than inflation. 
5 GAO-06-69R States’ Medicaid Payments for Prescription Drugs 

 

While we generally relied on and did not independently verify the data provided to us 

by the states, we reviewed the data for reasonableness and to identify unusual 

patterns, including outliers. To ensure that state payments and market-based prices 

were based on the same number of units, we compared the units used to calculate 

both. Where necessary, we recalculated unit payments to ensure valid per-unit 

comparisons. We also reviewed the reasonableness of states’ payments in 

comparison to their formulas for estimating acquisition cost. Additionally, we 

discussed unusual patterns and outliers with state Medicaid officials and as a result 

of unresolved data reliability concerns, eliminated six drugs from our basket.11 Our 

final basket contained 194 drugs, which consisted of 189 brand-name drugs—187 

single-source and 2 multiple-source drugs—and 5 generic drugs.12 

Our results cannot be generalized to states or drugs not included in our analysis. Our 

work also did not consider other mechanisms state Medicaid programs may use to 

control the costs of prescription drugs, such as the collection of rebates through 

federal and state programs and policies on the mandatory use of generic drugs. 

Furthermore, our analysis did not examine the utilization of drugs and therefore does 

not estimate cost savings for the Medicaid program. We performed our work from 

February 2004 through October 2005 in accordance with generally accepted 

government auditing standards. 

Results in Brief 

Overall, minimal variation existed among the five states’ payments for most drugs. 

Specifically, the five states’ payments for 189 brand-name drugs varied less than 7 

percent on average; the five states’ payments for the 5 generic drugs we reviewed 

varied 30 percent on average. States’ payment levels aligned with their respective 

formulas for estimating drug acquisition cost. In particular, states that based their 

estimates of drug acquisition cost on larger discounts off of AWP often paid the 

lowest amount for drugs; similarly, states that based their estimates of drug 

acquisition cost on smaller discounts off of AWP often paid the highest amount for 

drugs. 

The five states’ payments exceeded the three market-based prices we reviewed—

AMP, Best Price, and FSS Price. Each state’s payments exceeded these market-based 

prices for nearly all of the brand-name drugs we reviewed. On average, each state’s 

payments for brand-name drugs exceeded each market-based price by 10 percent or 

more. Additionally, states’ average payments for brand-name drugs were 12 percent 

higher than AMP, 36 percent higher than Best Price, and 73 percent higher than FSS 

11Five of the six excluded drugs were antihemophiliac factor drugs; the sixth drug was an injectable 

drug used to treat multiple sclerosis. As a result of data reliability concerns, we also excluded data on 

five drugs from one state, and data on one drug each from two states. 

12For the purposes of this report, we refer to single-source and multiple-source drugs that are marketed 

under a registered trade name as brand-name drugs. Single-source drugs are brand-name drugs that 

have no generic equivalent on the market and are generally available from only one manufacturer. 
6 GAO-06-69R States’ Medicaid Payments for Prescription Drugs 

Price, on average. Our results highlight the differences between states’ payments 

(based on the lower of states’ estimates of drug acquisition cost or the pharmacy’s 

usual and customary charge; for certain drugs, the FUL or the state MAC may apply if 

lower) and market-based prices (based on actual sales transaction data). 

Agency and State Comments 

We provided a draft of this report for comment to the Administrator of CMS and 

Medicaid directors in Mississippi, Montana, Pennsylvania, South Carolina, and Utah. 

CMS comments are included in enclosure II. We received technical comments from 

some states, which we incorporated as appropriate. 

CMS stated that this report makes it clear that the current payment rules result in 

overpayments for drugs and emphasizes the need for reform. CMS commented that 

payments should be determined using accurate acquisition cost data, which it said 

requires congressional action. Our review focused on describing how payments for 

prescription drugs compared across selected states and how these states’ payments 

compared to three market-based prices. As such, the scope of our work did not 

include an evaluation of the need to reform the current payment system. CMS also 

commented that it has encouraged states to review their estimates of drug acquisition 

cost and that states have submitted to the agency an increased number of 

amendments to their state Medicaid plans that would lower these estimates. Finally, 

CMS commented that the report focused solely on states’ payment rates for drugs and 

did not consider a variety of other approaches that states have adopted to control 

their drug spending. As we noted in our draft report, such consideration was beyond 

the scope of our work. 

One state—Utah—raised concerns that states do not have access to the market-based 

pricing data we used in our analysis, which makes it difficult for them to accurately 

estimate the acquisition cost of drugs. Our draft report noted that states do not have 

access to actual sales price data and that states therefore use published prices, such 

as AWP, to estimate the acquisition cost of drugs. 

- - - - - 

As agreed with your office, unless you publicly announce the contents of this report 

earlier, we plan no further distribution of it until 30 days from the date of this report. 

At that time, we will send copies to the Administrator of CMS and interested 

congressional committees. The report will also be available on GAO’s home page at 

http://www.gao.gov. 
7 GAO-06-69R States’ Medicaid Payments for Prescription Drugs 

If you or your staff have any questions about this report, please contact me at (202) 

512-7119 or kingk@gao.gov. Contact points for our Offices of Congressional 

Relations and Public Affairs may be found on the last page of this report. GAO staff

who made major contributions to this report are listed in enclosure III. 

Sincerely yours, 

Kathleen M. King 

Director, Health Care 

Enclosures – 3 
Enclosure I Enclosure I

8 GAO-06-69R States’ Medicaid Payments for Prescription Drugs

Medicaid: States’ Payments for 

Outpatient Prescription Drugs

Briefing for Congressional Staff

Subcommittee on Oversight and Investigations

House Committee on Energy and Commerce

(Updated)
Enclosure I Enclosure I

9 GAO-06-69R States’ Medicaid Payments for Prescription Drugs

2

Overview

• Introduction

• Objectives

• Scope and Methodology 

• Findings
Enclosure I Enclosure I

10 GAO-06-69R States’ Medicaid Payments for Prescription Drugs

3

Introduction

Overview

• Outpatient prescription drug coverage is an optional Medicaid benefit that

all 50 states and the District of Columbia provide.

• Spending on outpatient prescription drugs has been one of Medicaid’s

fastest growing medical care expenditures.

• Amid concerns about increasing Medicaid drug spending, focus has been 

drawn to the ways states pay for prescription drugs.
Enclosure I Enclosure I

11 GAO-06-69R States’ Medicaid Payments for Prescription Drugs

4

Introduction

Medicaid Drug Expenditure Growth

Growth in Total Medicaid Outpatient Prescription Drug Expenditures, Fiscal Years 1990 - 2003
Enclosure I Enclosure I

12 GAO-06-69R States’ Medicaid Payments for Prescription Drugs

5

Total Medicaid Outpatient Drug Spending as a Percentage of Total Medicaid Medical Care

Expenditures, Fiscal Years 1990 - 2003

Introduction 

Disproportionate Medicaid Drug Expenditure Growth
Enclosure I Enclosure I

13 GAO-06-69R States’ Medicaid Payments for Prescription Drugs

6

Introduction 

Medicaid Drug Payment

• State Medicaid programs pay pharmacies for covered outpatient drugs 

dispensed to Medicaid beneficiaries.

• States are required to pay pharmacies the lower of the state’s estimate of 

the drug’s acquisition cost to the pharmacy, based on a state-determined 

formula, plus a dispensing fee; or the pharmacy’s usual and customary 

charge to the general public. For certain drugs, the federal upper limit

(FUL) or the state maximum allowable cost (MAC) may apply if lower.

• All states use published prices, such as Average Wholesale Price (AWP), 

to estimate the acquisition cost of drugs because they do not have access

to actual sales price data, which are not publicly available. AWP is the 

average list price that a manufacturer suggests wholesalers charge

pharmacies.
Enclosure I Enclosure I

14 GAO-06-69R States’ Medicaid Payments for Prescription Drugs

7

Objectives

1. To describe how Medicaid payments for outpatient prescription drugs

compare across selected states.

2. To describe how selected states' Medicaid payments compare to

market-based prices.
Enclosure I Enclosure I

15 GAO-06-69R States’ Medicaid Payments for Prescription Drugs

8

Scope and Methodology

Overview

In conducting our work, we:

• Selected 200 prescription drugs that accounted for more than half of 2003

national Medicaid drug spending.

• Grouped drugs into therapeutic classes and by type (brand or generic) 

using 2005 First DataBank definitions. 

• Judgmentally selected 5 states for review.

• Interviewed officials from the 5 state Medicaid agencies.

• Reviewed 2003 drug payment data from the 5 states for the 200 drugs.

• Calculated each state’s average payment to pharmacies for each drug.

• Reviewed selected 2003 market-based price data from the Centers for 

Medicare & Medicaid Services (CMS) and the Department of Veterans 

Affairs (VA).

• Performed our work from February 2004 through October 2005 in

accordance with generally accepted government auditing standards.
Enclosure I Enclosure I

16 GAO-06-69R States’ Medicaid Payments for Prescription Drugs

9

Scope and Methodology 

Basket of Drugs

Our initial basket of 200 drugs reflected more than half of Medicaid’s national 

spending on outpatient prescription drugs in 2003.

• We performed data reliability testing on all state drug payment data.

• We recalculated unit payment amounts where necessary to ensure that

state payments and market-based prices were based on the same number 

of units.

• Due to data reliability concerns, we excluded 6 drugs from our basket.

1

For the 5 selected states, we performed analyses on a final basket of 194 

drugs that included: 

• 189 brand-name drugs (187 single-source and 2 multiple-source), and

• 5 generic drugs.

1We also excluded data on 5 drugs from 1 state and 1 drug each from 2 states due to data reliability concerns.
Enclosure I Enclosure I

17 GAO-06-69R States’ Medicaid Payments for Prescription Drugs

10

Scope and Methodology 

Therapeutic Classification of Drug Basket

Source: GAO classification of 2003 CMS data using 2005 First DataBank definitions.

Notes: Therapeutic classes with four or fewer drugs were collapsed into the “Other” class. Percentages do not add to 100 due to rounding.

Total 194 100%

Other 20 10%

Blood Products 5 3%

Antihistamines 5 3%

Hormones 7 4%

Antiarthritics 7 4%

Analgesics 8 4%

Gastrointestinal 9 5%

Hypoglycemics 11 6%

Unclassified 11 6%

Antiasthmatics 12 6%

Cardiovascular 16 8%

Central Nervous System 18 9%

Anti-infectives/Miscellaneous 18 9%

Psychotherapeutic 47 24%

Therapeutic class Number of drugs Portion of basket

Therapeutic Classification of Drug Basket
Enclosure I Enclosure I

18 GAO-06-69R States’ Medicaid Payments for Prescription Drugs

11

Scope and Methodology

Selection of States

We selected 5 states for analysis to include a range of payment levels based 

on the states’ use of a percentage discount off of AWP to estimate drug

acquisition cost.

Source: CMS.

South Carolina AWP minus 10%

Pennsylvania AWP minus 10%

Mississippi AWP minus 12%

Utah AWP minus 15%

Montana AWP minus 15%

Formula used to estimate 

drug acquisition cost,

State as of 2003

States Selected for Analysis
Enclosure I Enclosure I

19 GAO-06-69R States’ Medicaid Payments for Prescription Drugs

12

Scope and Methodology 

Selection of Market-Based Prices

We selected 3 market-based prices that are based on actual sales transactions.

• Average Manufacturer Price (AMP) and Best Price are currently used by the 

Medicaid program to calculate drug rebates.2

• Federal Supply Schedule (FSS) Price represents prices available to certain

federal government purchasers. 

2To help control Medicaid spending on drugs, the Omnibus Budget Reconciliation Act of 1990 established the Medicaid drug rebate

program. Under this program, a pharmaceutical manufacturer pays rebates to states in order for federal payments to be available under

Medicaid for the manufacturer’s outpatient prescription drugs.
Enclosure I Enclosure I

20 GAO-06-69R States’ Medicaid Payments for Prescription Drugs

13

Scope and Methodology 

Market-Based Price: Average Manufacturer Price

Average Manufacturer Price (AMP) is the average price paid to a

manufacturer by a wholesaler for drugs distributed to the retail pharmacy

class of trade. Transactions used to calculate AMP are required to reflect 

cash discounts and other price adjustments that affect the price actually

realized.

• AMP is calculated from actual sales transactions.

• AMP price determination methods vary across manufacturers.

• Manufacturers report AMP data to CMS on a quarterly basis.

• AMP data are not publicly available.

• Retail pharmacies may be unable to purchase drugs at AMP.
Enclosure I Enclosure I

21 GAO-06-69R States’ Medicaid Payments for Prescription Drugs

14

Scope and Methodology

Market-Based Price: Best Price

Best Price is the lowest price the manufacturer sells the drug to any purchaser

in any pricing structure, including capitated payments, with some exceptions. 

Best Price is required to be reduced to account for price adjustments such as

discounts and rebates.

• Best Price is calculated from actual sales transactions.

• Best Price determination methods vary across manufacturers.

• Manufacturers report Best Price data to CMS on a quarterly basis.

• Best Price data are not publicly available.

• Retail pharmacies may be unable to purchase drugs at Best Price.
Enclosure I Enclosure I

22 GAO-06-69R States’ Medicaid Payments for Prescription Drugs

15

Scope and Methodology

Market-Based Price: Federal Supply Schedule Price

Federal Supply Schedule (FSS) Price is intended to equal or better the prices

manufacturers charge their most favored commercial customers under 

comparable terms and conditions. On behalf of the federal government, the 

VA negotiates this price with manufacturers.

• All direct federal purchasers of pharmaceuticals may purchase drugs at the 

FSS Price, but other lower prices may be available to the largest federal

purchasers. Medicaid is not a direct purchaser of drugs.

• FSS Price is negotiated based on actual sales transactions to

manufacturers’ most favored commercial customers.

• Manufacturers report most favored commercial customer pricing data to VA.

• Manufacturers must list their brand-name drugs on the FSS in order to

receive payment for drugs covered by Medicaid.

• FSS Price data are publicly available.

• Retail pharmacies may be unable to purchase drugs at FSS Prices.
Enclosure I Enclosure I

23 GAO-06-69R States’ Medicaid Payments for Prescription Drugs

16

Scope and Methodology 

Limitations

• Findings are not generalizable to states or drugs not included in our 

analysis.

• Analysis did not consider all mechanisms states may use to control the 

costs of prescription drugs in their Medicaid programs, such as the 

collection of rebates through federal and state programs and policies on

the mandatory use of generics.

• Analysis did not examine drug utilization and therefore does not estimate 

cost savings for the Medicaid program.
Enclosure I Enclosure I

24 GAO-06-69R States’ Medicaid Payments for Prescription Drugs

17

Summary of Findings

For the 2003 data analyzed, we found that:

• Minimal variation existed among the 5 states’ payments for most drugs.

• The 5 states’ payments exceeded the 3 market-based prices for the 

brand-name drugs we reviewed.
Enclosure I Enclosure I

25 GAO-06-69R States’ Medicaid Payments for Prescription Drugs

18

Minimal Variation in States’ Payments for Most Drugs

Overview

• Brand-name drug payments varied less than 7 percent across the 5

states on average.

• Generic drug payments varied 30 percent across the 5 states on 

average.

• Gastrointestinal drug payments varied most across the 5 states on

average, among the therapeutic classes.

• State payment levels aligned with their respective formulas for 

estimating drug acquisition cost.
Enclosure I Enclosure I

26 GAO-06-69R States’ Medicaid Payments for Prescription Drugs

19

Minimal Variation in States’ Payments for Most Drugs

Payments for Most Brand-Name Drugs Varied Little

For the 189 brand-name drugs we reviewed, 

• The highest state payment exceeded the lowest state payment by 7

percent, on average.

• Payments for 50 percent of these drugs differed by 6 percent or less.

• Payments for 75 percent of these drugs differed by 7 percent or less.

• Payments for 95 percent of these drugs differed by 15 percent or less.

• Payments for 1 drug varied more than 26 percent.
Enclosure I Enclosure I

27 GAO-06-69R States’ Medicaid Payments for Prescription Drugs

20

Minimal Variation in States’ Payments for Most Drugs

Payments for Generic Drugs Varied Considerably

For the 5 generic drugs we reviewed,

• The highest state payment exceeded the lowest state payment by 30

percent, on average.
Enclosure I Enclosure I

28 GAO-06-69R States’ Medicaid Payments for Prescription Drugs

21

Minimal Variation in States’ Payments for Most Drugs

Payments for Gastrointestinal Drugs Varied Most

Source: GAO analysis of 2003 state data using 2005 First DataBank classifications.

5

7

5

7

16

18

11

20

47

18

12

11

8

9

Cardiovascular 7%

Antihistamines 4%

Antiarthritics 4%

Blood Products 5%

Hormones 6%

Central Nervous System 7%

Hypoglycemics 7%

Other 8%

Psychotherapeutic 8%

Anti-infectives/Miscellaneous 8%

Antiasthmatics 9%

Unclassified 10%

Analgesics 11%

Gastrointestinal 17%

Average difference between states’ lowest 

Therapeutic class payment and states’ highest payment

Number

of drugs

Percent Difference in the 5 States’ 2003 Drug Payments, by Therapeutic Class
Enclosure I Enclosure I

29 GAO-06-69R States’ Medicaid Payments for Prescription Drugs

22

Minimal Variation in States’ Payments for Most Drugs

States’ Payment Levels Aligned with their Acquisition Cost Formulas

Source: GAO analysis of 2003 state data.

Note: States with equivalent formulas for estimating drug acquisition cost do not necessarily pay the same amount for each drug because

payments are determined by the lower of the state’s estimate of drug acquisition cost or the usual and customary charge; for certain drugs,

the FUL or the state MAC may apply if lower. 

30

7

17

28

112

189

194

193

193

194

Number

of drugs

reviewed

Formula used to

estimate drug

acquisition cost, 

as of 2003

AWP minus 10%

AWP minus 10%

AWP minus 12%

AWP minus 15%

AWP minus 15%

The highest

state 

payment 

Less than

states’

average

payment

Among the 5 states, the number of drugs for

which each state’s payment was

South Carolina 65 57

Pennsylvania 9 113

Mississippi 91 22

Utah 174 1

Montana 180 1

The lowest

state 

payment

State

Level of State Payment for Drugs in 2003, by State
Enclosure I Enclosure I

30 GAO-06-69R States’ Medicaid Payments for Prescription Drugs

23

Minimal Variation in States’ Payments for Most Drugs

States’ Payment Levels Aligned with their Acquisition Cost Formulas

Number

of drugs

reviewed

Formula used to

estimate drug

acquisition cost, 

as of 2003

More than

20%

> 5-10% >10-20%

189

194

193

193

194

AWP minus 10%

AWP minus 10%

AWP minus 12%

AWP minus 15%

AWP minus 15%

Among the 5 states, the number of drugs for which each 

state’s payment exceeded the lowest state payment by

South Carolina 117 66 5 1

Pennsylvania 81 101 5 7

Mississippi 155 12 21 5

Utah 172 8 9 4

Montana 178 5 6 5

5% or less

State

Variation in State Payment for Drugs in 2003, by State

Source: GAO analysis of 2003 state data.

Note: States with equivalent formulas for estimating drug acquisition cost do not necessarily pay the same amount for each drug because

payments are determined by the lower of the state’s estimate of drug acquisition cost or the usual and customary charge; for certain drugs, the

FUL or the state MAC may apply if lower.
Enclosure I Enclosure I

31 GAO-06-69R States’ Medicaid Payments for Prescription Drugs

24

States’ Payments Exceeded Market-Based Prices

Overview

Among the 5 states we reviewed, 

• Medicaid payments were the highest for nearly all brand-name drugs in our

basket.

• States’ 2003 average payments for brand-name drugs were, on average:

 12 percent higher than AMP.

 36 percent higher than Best Price.

 73 percent higher than FSS Price.
Enclosure I Enclosure I

32 GAO-06-69R States’ Medicaid Payments for Prescription Drugs

25

States’ Payments Exceeded Market-Based Prices

Each State’s Payments Were the Highest for Nearly All Brand-Name Drugs

Among the 5 states we reviewed,

• Each state’s payments exceeded market-based prices for nearly all

brand-name drugs in 2003.3

• Each state’s payments exceeded market-based prices for brand-name

drugs, on average.

AWP minus 10%

AWP minus 10%

AWP minus 12%

AWP minus 15%

AWP minus 15%

Formula used to estimate 

drug acquisition cost,

as of 2003

South Carolina 13% 37% 74%

Pennsylvania 15% 39% 77%

Mississippi 13% 36% 73%

Utah 10% 34% 70%

Montana 10% 33% 69%

AMP Best Price FSS Price

State

Average Percent by which State Payments Exceeded Market-Based Prices for Brand-Name

Drugs in 2003, by State

Source: GAO analysis of 2003 state, CMS and VA data.

3Specifically, state payments exceeded market-based prices for all drugs we reviewed except for the following cases: Mississippi’s

payments exceeded AMP for all but 1 drug and exceeded Best Price for all but 1 drug; Pennsylvania’s payments exceeded AMP for all 

but 3 drugs and exceeded Best Price for all but 1 drug; and South Carolina’s payments exceeded AMP for all but 2 drugs.
Enclosure I Enclosure I

33 GAO-06-69R States’ Medicaid Payments for Prescription Drugs

26

States’ Payments Exceeded Market-Based Prices

States’ Average Payments Were the Highest for All Brand-Name Drugs

Among the 5 states we reviewed,

• States’ average payments for brand-name drugs exceeded all 3 marketbased prices we reviewed.

• AMP, Best Price and FSS Price were lower than states’ average payments 

for brand-name drugs. Among these prices,

• FSS Price was the lowest price for 164 drugs.

• Best Price was the lowest price for 25 drugs.
Enclosure I Enclosure I

34 GAO-06-69R States’ Medicaid Payments for Prescription Drugs

27

States’ Payments Exceeded Market-Based Prices

States’ Average Payments Exceeded AMP

For the 189 brand-name drugs we reviewed,

• States’ average payments exceeded AMP by 12 percent, on average.

• States’ average payments for 50 percent of these drugs exceeded AMP by 

11 percent or less.

• States’ average payments for 75 percent of these drugs exceeded AMP by 

13 percent or less.

• States’ average payments for 1 drug exceeded AMP by more than 30

percent.
Enclosure I Enclosure I

35 GAO-06-69R States’ Medicaid Payments for Prescription Drugs

28

States’ Payments Exceeded Market-Based Prices

States’ Average Payments Exceeded Best Price

For the 189 brand name drugs we reviewed,

• States’ average payments exceeded Best Price by 36 percent, on

average.

• States’ average payments for 50 percent of these drugs exceeded Best 

Price by 28 percent or less.

• States average payments for 75 percent of these drugs exceeded Best

Price by 36 percent or less.

• States’ average payments for 6 drugs exceeded Best Price by more than

100 percent.
Enclosure I Enclosure I

36 GAO-06-69R States’ Medicaid Payments for Prescription Drugs

29

States’ Payment Exceeded Market-Based Prices

States’ Average Payments Exceeded FSS Price

For the 187 brand name drugs we reviewed,4

• States’ average payments exceeded FSS Price by 73 percent, on average.

• States’ average payments for 50 percent of these drugs exceeded FSS 

Price by 65 percent or less.

• States’ average payments for 75 percent of these drugs exceeded FSS 

Price by 86 percent or less.

• States’ average payments for 29 drugs exceeded FSS Price by more than

100 percent.

4FSS Prices were only available for 187 of the 189 brand-name drugs in our basket. 
Enclosure II Enclosure II

37 GAO-06-69R States’ Medicaid Payments for Prescription Drugs

Comments from the Centers for Medicare & Medicaid Services 
Enclosure II Enclosure II

38 GAO-06-69R States’ Medicaid Payments for Prescription Drugs 
Enclosure III Enclosure III 

39 GAO-06-69R States’ Medicaid Payments for Prescription Drugs

GAO Contact and Staff Acknowledgments 

GAO Contact 

Kathleen M. King, (202) 512-7119 or kingk@gao.gov

Acknowledgments 

In addition to the contact named above, Debra Draper, Assistant Director; Jennie 

Apter; Robin Burke; Jessica Cobert; Martha R. W. Kelly; Kevin Milne; Daniel S. Ries; 

and Patricia Roy made key contributions to this report. 

(290329) 
This is a work of the U.S. government and is not subject to copyright protection in the 

United States. It may be reproduced and distributed in its entirety without further 

permission from GAO. However, because this work may contain copyrighted images or 

other material, permission from the copyright holder may be necessary if you wish to 

reproduce this material separately. 
The Government Accountability Office, the audit, evaluation and 

investigative arm of Congress, exists to support Congress in meeting its 

constitutional responsibilities and to help improve the performance and 

accountability of the federal government for the American people. GAO 

examines the use of public funds; evaluates federal programs and policies; 

and provides analyses, recommendations, and other assistance to help 

Congress make informed oversight, policy, and funding decisions. GAO’s 

commitment to good government is reflected in its core values of 

accountability, integrity, and reliability. 

The fastest and easiest way to obtain copies of GAO documents at no cost 

is through GAO’s Web site (www.gao.gov). Each weekday, GAO posts 

newly released reports, testimony, and correspondence on its Web site. To 

have GAO e-mail you a list of newly posted products every afternoon, go 

to www.gao.gov and select “Subscribe to Updates.” 

The first copy of each printed report is free. Additional copies are $2 each. 

A check or money order should be made out to the Superintendent of 

Documents. GAO also accepts VISA and Mastercard. Orders for 100 or 

more copies mailed to a single address are discounted 25 percent. Orders 

should be sent to: 

U.S. Government Accountability Office 

441 G Street NW, Room LM 

Washington, D.C. 20548 

To order by Phone: Voice: (202) 512-6000 

TDD: (202) 512-2537 

Fax: (202) 512-6061 

Contact: 

Web site: www.gao.gov/fraudnet/fraudnet.htm 

E-mail: fraudnet@gao.gov

Automated answering system: (800) 424-5454 or (202) 512-7470 

Gloria Jarmon, Managing Director, JarmonG@gao.gov (202) 512-4400 

U.S. Government Accountability Office, 441 G Street NW, Room 7125 

Washington, D.C. 20548 

Paul Anderson, Managing Director, AndersonP1@gao.gov (202) 512-4800 

U.S. Government Accountability Office, 441 G Street NW, Room 7149 

Washington, D.C. 20548 

GAO’s Mission 

Obtaining Copies of 

GAO Reports and 

Testimony 

Order by Mail or Phone 

To Report Fraud, 

Waste, and Abuse in 

Federal Programs 

Congressional 

Relations 

Public Affairs 

PRINTED ON RECYCLED PAPER